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Diversification Strategies
Concentric diversification Conglomerate diversification Horizontal diversification
Diversification Strategies
Concentric Diversification Adding new, but related, products or services
Diversification Strategies
Guidelines for Concentric Diversification
Competes in no-growth or slow-growth industry Adding new & related products increases sales of current products New & related products offered at competitive prices Current products are in decline stage of the product life cycle Strong management team
Diversification Strategies
Conglomerate Diversification Adding new, unrelated products or services
Diversification Strategies
Guidelines for Conglomerate Diversification
Declining annual sales and profits Capital and managerial talent to compete successfully in a new industry Financial synergy between the acquired and acquiring firms Existing markets for present products are saturated
Diversification Strategies
Horizontal Diversification Adding new, unrelated products or services for present customers
Diversification Strategies
Guidelines for Horizontal Diversification
Revenues from current products/services would increase significantly by adding the new unrelated products Highly competitive and/or no-growth industry w/ low margins and returns Present distribution channels can be used to market new products to current customers New products have counter cyclical sales patterns compared to existing products
Diversification Strategy
OUTLINE
! Introduction: The Basic Issues ! The Trend over Time ! Motives for Diversification
COMPETITIVE ADVANTAGE
Diversification decisions involve these same two issues: How attractive is the sector to be entered? Can the firm achieve a competitive advantage?
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Note:
During the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses
70 60 50 40 30 20 10 0 1950 1960 1970 1983 1993 Single business Dominant business Related business Unrelated business
MANAGEMENT GOALS
COMPANY DEVELOPMENTS
Rise of conglomerates Emphasis onrelated Refocusing on Related diversification core businesses & concentric by industrial firms Divestment diversification
Value based Transaction management cost analysis Core competences Dominant logic Dynamic capability
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! But, growth satisfies managers not shareholders. ! Growth strategies (especially by acquisition), tend
PROFIT
! For diversification to create shareholder value,
then bringing together of different businesses under common ownership & must somehow increase their profitability.
1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).
1. The Attractiveness Test: diversification must be directed towards attractive industries (or have the potential to become attractive).
2. The Cost of Entry Test : the cost of entry must not overwhelm all future profits.
Transferring functional capabilities (marketing, product development) across businesses Applying general management capabilities to multiple businesses
Relatedness in Diversification
Economies of scope in diversification derive from two types of relatedness:
! Operational Relatedness-- synergies from sharing
deriving from the ability to apply common management capabilities to different businesses.
Relatedness in Diversification
Problem of operational relatedness: the benefits in terms of economies of scope may be dwarfed by the administrative costs involved in their exploitation.
Branson & the Virgin Companies: Making strategic sense of apparent entrepreneurial chaos
KEY RESOURCES
Virgin brand Branson -charisma/image --PR skills -networking skills -entrepreneurial flair
DOMINANT LOGIC
Seek competitive advantage by start-up cos. pursuing innovative differentiation in underserved market with sleepy incumbents
CHARACTERISTICS OF MARKETSTHAT CONFORM TO THIS LOGIC
Whats the business model? (Does Virgin create value by being an entrepreneurial incubator, a venture capital fund, a diversified corporation, or what?) Which businesses to divest? Criteria for future diversification What type of structure?Is there a need for greater formalization?
consumer dominant incumbent scope for new approaches to customer service high entry barriers to other start-ups Branson/Virgin image appeals to customers